Applying Indirect Costs to your Grants

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Once you have your indirect cost rate, how do you use it to recover costs?

Recovery of indirect costs must be done consistently with the terms of your rate proposal. The rate should be applied to the direct cost base (modified total direct costs, direct salaries, or other base defined in your rate agreement)

For this illustration assume that your organization has a negotiated indirect cost rate of 36.2% and a modified direct cost base. Direct expenses at the end of the first month of the grant were $78,000, which included a $20,000 capital equipment purchase.

Direct Costs                               $78,000
Less Pass-Through items  ($20,000)
Direct Cost Base                     $58,000
Indirect Cost Rate                    36.2%                        per NICRA
Indirect Costs Calculated $20,996                     $58,000 x 36.2%
Total Expenses                         $98,996                    $78,000 direct + $20,996 indirect


The following month, an additional $47,000 in direct expenses are charged to the grant, with no pass-through items.

Total Expenses                                          $145,996                $78,000+20,996+47,000
Less: Pass-Throughs                                ($20,000)              From previous month(s)
Less: Indirect Costs Charged             ($20,996)             From previous month(s)
Direct Cost Base                                      $105,000              For first 2 months
Indirect Costs Calculated                      $38,010             $105,000 x 36.2%
Less: Indirect Costs Prev Charged $(20,996)
Indirect Costs to Charge Month 2   $17,014

In my opinion its best to apply indirect costs cumulatively (like the example above) rather than only looking at the month just ended. Doing so enables you to account for any changes in expense in a prior month (a voided check two months after issuance, for instance). The indirect cost application will correct itself when the next month is calculated.